Home World Business Why the market doesn’t care about liar loans

Why the market doesn’t care about liar loans

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I have a “liar loan” – a mortgage based on less than absolutely factual information. I’ve pretty much always had liar loans. And I recently obtained a “liar credit card”. So what?

Given readers’ (and therefore the media’s) love of stories that combine housing and doomsday scenarios, investment bank UBS received saturation coverage with its idea that $500 billion in “liar loans” are a hanging over the Australian housing market, set to come crashing down on the economy at the first hint of trouble and damn us all to hell.

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Another hit to homebuyers

Anyone buying a brand new home will soon have to pay GST, previously billed to developers, raking in hundreds of millions of dollars.

“We’ll all be rooned,” said Hanrahan.

I’m calling bullshit. It doesn’t pass the common sense test and there’s no evidence to support it – only the assertions made in a survey and some rather wild conclusions drawn from that.

Oh, I don’t doubt that a fair proportion of mortgage applications are less than “completely factual and accurate”. On the basis of a survey (yes, yet another survey) of 907 people who said they took out a mortgage in the past year, UBS reckons 32 per cent of mortgage applications are less than totally ridgy-didge.

Mine have never been. Do you know with complete accuracy what your monthly expenses are? I don’t. Faced with another interminable form, I make a rough guess. It would not be accurate. I’m very impressed that 67 per cent of the UBS survey respondents claimed they really know – more power to them and an apparent ability to budget that eludes most of us.

It’s much easier to have a solid idea of income – it’s there in your tax return. No surprise that the UBS story admits most of the inaccuracies are on the expense side.

Yes, there are some cowboy mortgage brokers encouraging applicants to get the answers right for the loan they want. That’s been the case since there were mortgage brokers.

Given the Australian Securities and Investments Commission and the Australian Prudential Regulation Authority are waving their sticks at the banks and the institutions themselves having the odd concern in the present open season on bank bashing, it is very reasonable to think there’s been a tightening of prudential standards – but the UBS crew would have you believe the opposite has happened, that standards have loosened.

I don’t believe it. And the evidence that actually exists – as opposed to anecdotes – indicates we’re far from being awash in American-style liar loans.

The evidence

Loans that are in real stress – not the vague, concocted “I don’t have spare cash” mortgage stress purveyed without questioning by 4Corners last month – are running at a relatively low level. Most of the real stress is in Perth and towns that were dependent on the resources construction boom, the relatively limited areas that have seen a rise in unemployment. Nationally, we’re doing rather well.

New RBA research shows first homebuyers who borrow from parents struggle.

New RBA research shows first homebuyers who borrow from parents struggle. Photo: Peter Braig

And the latest research by the Reserve Bank shows that the people who you’d think would be the most at risk – stretched first home buyers – are actually paying down their loans as successfully as the pre-GFC generation and that they are much more financially secure than those who didn’t bite the bullet. FHBs with bank loans are doing OK – it’s those who borrowed from the Bank of Mum and Dad who are more likely to be in trouble.

It’s nearly 18 months since a hedge fund manager gained similar headlines after a drive around Sydney’s western suburbs and making even wilder claims. And, yes, the hedgie had been shorting Australian banks before the story.

It’s nine years since Steve Keen’s infamous 60 Minutes interview scaring people about an imminent 40 per cent crash in housing prices with Armageddon to follow. And in between there have been interminable Harry Dents and perma-bears promising that, any day now, Australian housing and banks were set to implode. We’re still waiting.

The only surprise about the 4Corners housing beat-up last month was that it didn’t include Keen and Dent, but other bears were readily available.

Improbable implosion

Yes, housing in Sydney and Melbourne is eye-wateringly expensive. It is creating societal problems. Real estate wealth – not income – is the core of our inequality concerns. It’s quite possible, probable, that some markets are overheated and could do with a correction – but that’s not as big a deal as the scaremongers would have you believe.

Do you remember the 10 per cent “crash” in Sydney housing prices in 2008? No, I didn’t either until I saw the CoreLogic graph. Sydney prices tend to run ridiculously hard and then go flat until the next time.

The motherlode for doom-and-gloom forecasters is our record level of household debt, nudging 190 per cent of disposable income. It makes for a frightening graph that’s a regular excuse for someone to grab a headline with the observation that the RBA wouldn’t have to lift rates much to cause a recession. (Memo to such people: the RBA knows that.)

The record-household-debt story is more common than bushfire warnings. Less common is the other half of the RBA chart pack graph – because rates are so low, the servicing that debt is the easiest it’s been in 14 years.

And what’s never seen is the net household debt story. Our net debt – loans minus cash and other financial assets not including equities or superannuation – actually peaked in 2006, retreated a bit and has been relatively flat for a decade.

Still scared?

This graph, from the latest CBA results presentation, tells the story.

graphic

Not nearly as scary, is it?

There’s also the question of what we’ve been doing with our debt. Most of it has been going into investment, not holidays in Bali and new TVs. Our holdings of financial assets and real estate have risen considerably faster than our debt. The ratio of household debt to assets is the best it’s been in a decade.

And then there’s superannuation – some $2.3 trillion worth. By comparison, Australia’s total housing mortgage book is worth $1.6 trillion out of housing valued at some $6 trillion.

The Big Four banks hold $1.3 trillion in mortgages. Homes make up more than half of their book. That means the banks would be in a spot of bother if the housing market crashed by 40 per cent.

The missing step is that the entire Australian economy would have to be in more than a spot of bother for the housing market to suffer such a plunge. As has been repeatedly demonstrated, it takes a serious rise in unemployment to noticeably increase home loan defaults. Nevertheless, a rise in loans in arrears from one-fifth of stuff-all to one-quarter of stuff-all still results in headlines like: “Housing crisis: problem loans soar 20 per cent”

During our last recession – a tough recession by anyone’s standards – Australians did their best to hang onto their homes. Defaults certainly rose, but did become a crisis.

The regulators making interest-only loans more expensive is aimed at encouraging us to continue to build up equity buffers and pay down mortgages. Turns out though that even folks with interest-only loans have a tendency to do that with large offset accounts.

Surplus surveys

Meanwhile, back at the UBS survey – really? We’re surveyed to death. How many people want to do the work to supply detailed financial information about their mortgage application and, apparently, admit they lied? Something isn’t adding up.

And there’s the particular case of the ANZ which received the worst result:

“Of those who took out loans with ANZ in 2017 (directly or through a broker), 55 per cent of respondents stated their application was completely factual and accurate (implying 45 per cent of customers misstated their application), down from 66 per cent in 2016.”

ANZ was less than impressed with the UBS survey.

ANZ was less than impressed with the UBS survey. Photo: Jesse Marlow

It allegedly didn’t matter with ANZ whether the loan was done directly with the bank or through a broker.

The ANZ was none too impressed, wondering about the size of the survey for starters. UBS says 907 borrowers had the time and the interest to respond. I asked specifically how many were ANZ customers. UBS said they had not released that information but it was “fair to assume” ANZ was proportionate to its market share.

ANZ has 15.6 per cent of the mortgage market, so that would be 141 ANZ respondents. I wonder.

The most obvious point is, when applying directly to your bank, the bank should know more about your finances than you do anyway. For my “liar loans”, all my income and spending washes through the bank cheque account. I’m Australian – near enough is good enough.

And then there’s the UBS claim that people were actually finding it easier to get mortgages this year than last. Hmmm – how many people in their survey took out a mortgage in 2016 and took out another one in 2017? Just wondering.

No, it doesn’t seem credible – altogether too amazing that prudential standards have gone in the opposite direction to the pressure being applied. Maybe that’s why it was such big news.

And it looks like I’m not the only one that doesn’t believe it. In the two days says the UBS survey was the front page lead, bank shares have done very nicely indeed. CBA, the bank with the biggest housing book, has seen its shares rally three per cent. ANZ, the one allegedly stuffed with liar loans is up nearly two per cent.

No, the market doesn’t believe it either.

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